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Yomiuri Weekly: Nova in Flames

Tue, 10/16/2007 - 20:15 — Shawn

The current edition of the Yomiuri Weekly has published a fairly long article on the stock dealings of Nova that paints Sahashi in a poor light (as if you didn't know that already). Here's a translation of the article.

Nova in Flames: President on the run and 8 million missing shares.

A flood of students canceling their contracts and cash flow problems has Nova mired in shady stock transactions. And 8 million of Nova founder Nozomu Sahashi’s shares, worth 300 million yen, are missing. Amidst repeated failures, calls for Sahashi’s resignation are increasing.

On October 9, Nova announced the issue 200 million new equity warrants to Rich Peninsula Trading Limited and Tower Sky Profits Limited, funds registered in the British Virgin Islands. If both firms exercise their warrants, it would mean an injection of approximately 6.4 billion yen.

However, 8 million of Nova’s shares, worth some 300 million yen, have gone missing since August. Who has these 8 million shares?

The shares are believed to belong to Sahashi and Nova Kikaku. According to disclosure documents concerning the holding of large volumes of stock submitted to the Kanto Local Finance Bureau, the shares were traded in July when Sahashi signed a share lending agreement with Tokyo based business consulting firm, Roots, loaning them 10 million shares on July 20 and another 12 million shares on July 29.

In loaning shares, ownership is transferred to the borrower, but returns to the lender when the contract period expires.

According to Nova, when it asked Roots to raise money, Roots replied that this could be done using stock, and thus loaned Roots 10 million shares. But in signing the agreement, Roots asked for an additional 12 million shares saying that there was no other way in order to raise capital, and Nova gave in to their demand.

The 11 million shares in the lending agreement were to be returned on August 10. Roots returned 14 million shares by that date, and when Nova requested that the remaining 8 million shares be returned, Roots announced on September 20 that it was retaining 8 million shares for the purpose of “financing and management.”

In other words, the lender asked for its shares back and the borrower said, “No.”

Nova says it understood that the 11 million shares not in the original agreement were to be returned before the expiry date of the agreement, and when the agreement lapsed, it asked for the outstanding 8 million shares back.

Were the shares not going to be returned?

In the course of investigating this story, an entirely different explanation emerged.

According to sources, Sahashi entered into an agreement where he loaned Roots 22 million shares of which 11 million were used to raise money for Nova and the remaining 11 million shares were to be managed by Roots. In return, Roots loaned Nova 495 million yen.

This explanation suggests that Sahashi understood that the shares would not necessarily be returned.

The relationship between the two companies started in July. An agent acting on behalf of Sahashi requested that Roots use stock to generate some cash. The negotiations leading to the agreement took place at Nova’s Shinjuku headquarters in Tokyo with Sahashi himself said to have strongly demanding money be provided in mid July. Since Roots was unable to come up with 495 million yen in cash so quickly, it provided a loan in the form of a cheque, which was deposited into four bank accounts in Nova’s name.

According to a financial analyst who specializes in stock transactions, the details of the agreement are unheard of. “In order to accept the loan, for a party to offer an equivalent value or amount in stock in addition to the collateral, is an absurd condition for Nova. Even if Nova is strapped for cash, it’s not how a company listed on a stock exchange raises money.”

According to another source, the agreement was supposed to have been kept confidential.

However, in documents meant for investors, Nova announced in September that it wanted its 8 million shares back from Roots. From Roots’ perspective, the terms of the agreement did not match the reality.

Moreover, the stock transactions are confirmed by documents filed concerning the holding of large volumes of stock.

On July 30, the day after Nova loaned Roots the shares, France-based BNP Paribas acquired 8 million Nova shares in after market trading.

On August 6, Paribas transferred 8 million shares to UBS Securities via a debt-credit transaction. Both firms then repeatedly bought and sold the 8 million shares. According to the source, these 8 million shares are not the unreturned 8 million but part of the 11 million shares used to raise money.

On this point, Paribas maintains that it was a transaction between businesses and therefore wouldn't reveal what ultimately happened to the shares (and didn't acknowledge the dispute between Nova and Roots).

Where’s Sahashi?

Roots would like to get to the bottom of Sahashi’s remarks but to date has been unable to get in contact with him.

It’s peculiar for the president of a company listed on a stock exchange to be out of contact, but according to a former Nova executive who was close to Sahashi, “Sahashi really hates having his schedule controlled by someone else to the point that even his secretary doesn’t know his whereabouts. Only the executives who know his mobile phone number or email address can get in touch with him.”

The former executive also added, “The power to make decisions is centered on Sahashi, and you can’t even purchase a PC without his approval. There are three other directors in addition to Sahashi and even if they decided to hold a board meeting they don’t form a decision-making body.”

Nova’s situation is steadily worsening. After problems surfaced over deceptive advertising and misleading explanations, METI ordered Nova to suspend part of its business in June. In violating the Specified Commercial Transactions Law with its aggressive contract solicitations to get new students to sign up and method of calculating refunds for canceled contracts, Nova is prohibited from signing new contracts longer than one year for 6 months.

In April, the Supreme Court ruled that Nova’s refund method was illegal. In addition to former students filing lawsuits across the country over their refunds, between April and June, 788 students canceled their contracts, pushing the amount of money owed for refunds to more than 1.6 billion yen. With rent unpaid for some schools and salaries to pay, some 50 schools were closed at the end of September.

The former Nova executive had this to say about Nova’s situation, “Operating capital comes from student lesson fees paid upfront. If this money stops coming in, it becomes a day-to-day operation very quickly.”

Nova posted a loss of 2.4 billion yen for the first quarter of fiscal 2007. With payment of refunds problematic, consumer information centers have been receiving complaints.

The company is imploding with employees’ pay being late, the Labour Standard Inspection Office filing non-compliance warnings against Nova 4 times, and executive level staff quitting.

A resignation to save the company

Under these circumstances, the JASDAQ stock exchange ordered Nova on September 21 to improve its internal management and the way it discloses information. However, it rejected the report Nova submitted on October 5 for being weak on details, and told Nova to resubmit it by October 19. Regarding the problems surrounding the shares Nova headquarters said that it has laid everything out in the investor relations documents and business improvement report.

When the Weekly Yomiuri asked the president of Roots about the 8 million shares he was holding onto, he replied, “They are being managed some place else and can be returned at any time.” He also charged that, “This problem could be resolved if we met directly and talked things out. But for him to run about in circles is not something the president of an industry leading company does.”

Sahashi is rumored to be hiding out in Tokyo, staying at various luxury hotels. On the day the cash injection was announced, he sent an email to boost the morale of executives saying that it has been tough on everyone but there just one more step [until things get better]. Says the former Nova executive of the current situation, “If Sahashi doesn’t resign, Nova will not be able to recover,” and this puts into question Sahashi‘s moral obligation as the head of a leading company with students across the nation to show himself.

As of the end of March, Nova had 418,000 students enrolled across Japan along with 2000 Japanese staff and 5000 foreign teachers. At the very least, Sahashi needs to show his face and explain himself to everyone.

Nova shares timeline

July 20-29

Sahashi and Nova Kikaku loan 22 million shares to Roots.

July 30

BNP Paribas acquires 8 million shares in off market trading.

August 2

Roots returns 3 million shares to Sahashi.

August 6

UBS Securities acquires 8 million shares from BNP Paribas.

August 7

UBS divests its 8 million shares to a foreign investor.

August 10

Roots returns 11 million shares to Sahashi and Nova Kikaku.

August 30

BNP Paribas divests its 8 million shares to a foreign investor.

September 11

Nova demands that Roots return 8 million shares.

September 20

Roots announces that it is retaining 8 million shares for “financing
and management.”

September 21

UBS acquires 8 million shares through a loan transaction and then trades them the same day.

October 9

Nova announces the issue of new equity warrants to two foreign investment funds.

Comments

Excellent Post!!!
Are you drones going to keep working for Monkey Bridge?
1 minute late you get docked heaps of pay. But your boss can just secretly prance around as he pleases. He couldn’t even return calls or show up to a meeting. That’s all he had to do and he could have taken major steps to save his company, raise cash to pay your salary and follow through on his commitments to his customers. If you really feel the need to volunteer your time, you should find a more worthy cause then the SARAHASHI RIP OFF FOUNDATION.

This unfolding Nova saga reminds me of the final months I experienced at Lado. For those of you who aren't sure how this is all going to turn out, just do a little research on Lado's fall. I'm pretty sure Nova is following Lado's footsteps.